Zeek one year later

Friday

Aug 16, 2013 at 4:26 PM

As cars whiz by on West Center Street in Lexington, nearly every driver takes a glimpse of the small brick building with large windows.

BY NASH DUNNThe Dispatch

As cars whiz by on West Center Street in Lexington, nearly every driver takes a glimpse of the small brick building with large windows.The old blue-and-white sign that once pictured a large "Z" has long been gone, as are the winding lines of anxious investors who used to frequent this place, but passersby still know what the building represents.It's been one year since the federal government shut down Zeek Rewards, the penny-auction based company that attracted nearly 2.2 million users in 100 different countries from the one-story structure that connects to a Laundromat. In less than two years — 19 months — the company's rapid rise and promising payouts gave hope to millions of people who looked to earn a quick buck — "affiliates" who would only later be immersed in what some claim to be the densest Ponzi scheme of all time."Lexington has always been known for barbecue. Whoever thought so many people would be coming to Lexington for a penny auction company?" said Randy Jarvis, a former Lexington resident and Zeek Rewards user who met hundreds of affiliates while working at the Holiday Inn Express next to Childress Vineyards.Jarvis, 48, who now lives in Pennsylvania, said upper-level affiliates would nearly book the entire hotel, some staying for weeks to attend "Red Carpet Events" run by the program's former chief officer, Davidson County resident Paul Burks.He said affiliates from Australia showed him how they were making $200,000 a day through the program while another couple from Vermont, who eventually talked him into signing up, showed him actual checks to validate the thousands they were making."I met all these people from all over the world who were going to this small building in Lexington and putting all their money in this program," Jarvis said. "It was like something I've never experienced."Zeek Rewards was one of the first penny auction-based programs to present profit-sharing opportunities to its customers. Promoted as the advertising division of the penny auction website, Zeekler.com, affiliates essentially invested by purchasing large quantities of bids to be used on the auction site. Most affiliates then sold or gave away those bids to new auction users and placed one daily advertisement for the program online, which enabled them to share in the company's daily net profits.However, the U.S. Securities and Exchange Commission alleged Zeek Rewards affiliates were not buying into a legitimate business model, but rather financing other investors' paychecks. The SEC, which froze the company's assets Aug. 17, 2012, claimed that more than 90 percent of the company's revenues, and subsequent daily net profits, were derived from new affiliates, rather than actual retail purchases on the penny auction site, according the SEC's original complaint.Receiver projects 'substantial' returnsDr. Lloyd Lohr of Lexington has an innate distrust for "get rich quick" schemes. Yet after seeing the success of others in Zeek Rewards in the summer of 2012, he decided to give it a shot."After watching what it was doing, I thought, 'I hope I'm right that it's a good thing,'" said Lohr, a medical doctor specializing in women's health. "But I still had that gut feeling that it's too good to be true."Most affiliates bought in with Zeek Rewards anywhere from $1,000 to $10,000 in the company. Some families who invested together bought in for upward of $50,000 total. Most, like Lohr, have little hope of getting all their money back."I don't imagine I'd get most back, but I'd like to get some back," Lohr said.About 840,000 people lost money in Zeek Rewards, estimates the court-appointed receiver Ken Bell, who is tasked at collecting money to return to "net losers."So far, more than 110,000 claims, totaling more than $350 million, have been filed through the ongoing claims process, which ends Sept. 5. In his uptown Charlotte office earlier this month, Bell said some affiliates may be returned more than they think."There will be a substantial return to some of these victims," Bell said. "I just hope that everybody who has a legitimate claim will make one. My job is to make people as whole as possible, and I can't do that if people don't make a claim."While Bell said it would be impossible to project a specific "on the dollar" amount that "net losers" could receive, he did not think 10 cents or 20 cents on the dollar was "substantial."Claims can be made through a portal located on www.zeekrewardsreceivership.com. The claims process is being held electronically mostly to save money, Bell said, but affiliates can request to submit a claim by other method by sending an email to claims@zeekrewardsreceivership.com.To date, the receivership team has collected more than $300 million for "net losers," mostly from financial institutions and online payment processors and "e-wallets." Bell said he is happy overall with the progress of the receivership, adding that he would like to make a preliminary distribution to valid claimants by the end of the year.There have been some setbacks, though, including sorting out terabytes of information in Zeek's databases without nearly any help from company insiders."It's not on standard business software. It's stuff they created on their own, and they wrote code on their own," Bell said. "We didn't have access to the insiders who created that software and data because they had government problems and aren't at liberty to talk to me, I suppose."Burks was the only company insider who offered some assistance in sorting out the company's databases early on, Bell said, but that communication has since ended.The receivership also ran into delays from profiting affiliates who fought for Zeek Rewards. Some claimed the SEC action was an overreach by the government and defended the program.It's estimated that about 77,000 "net winners" pulled out more money than they put in. Several of the highest-profiting affiliates, who made more than $1 million through the program, filed motions early on obstructing the receivership's progress, including one that intended to dissolve the receivership altogether. A federal judge denied all the measures.Bell said the receivership has also spent some time responding to federal and state class-action lawsuits filed by large groups of affiliates.The receivership team has requested about $4.5 million in fees and expenses, which reflects about 1.4 percent of the total recovery of about $325 million so far. When it's all said and done, Bell thinks overall fees and expenses of receivership as a percentage to recovery will be remarkably low."The mantra I always hand out when we have team meetings is, 'Be as efficient as possible and as cost efficient as possible,' because every dollar the receivership spends on professionals and people working on it is a dollar not available to go to the victims," Bell said.'Clawback' suits comingThe receivership estimates that more than $295.5 million was "fraudulently transferred" to thousands of Zeek's "net winners."Bell intends to get that money back through "clawback" lawsuits, which seek to recover profits from investors, employees or other parties who were transferred money. Bell said the plan is to sue a handful of the largest profiteers by name, then follow up in a defensive class action, which will target a much larger group of "net winners.""I think we'll sue 15,000 or 16,000 people in the next few months," Bell said, adding that number does not reflect all the affiliates capable of being sued.One potential clawback subject could be Burks, who declined a request for an interview. Burks' attorney, Noell Tin, did not respond to a phone call.Burks, who moved from his home near uptown Lexington to another location in northeastern Davidson County in recent months, paid a $4 million fine and settled with the SEC without admitting or denying the allegations. Burks has not been charged criminally.Jordan Maglich, a Florida attorney and expert on Ponzi schemes and white-collar crime, said the Zeek "clawback" process could be one of the most complicated efforts in the history of receiverships due to the large number of potential targets."Clawback litigation is costly, can last for several years and does nothing more than both delay the claims process and deplete the potential funds available for distribution to victims," Maglich said, speaking generally of clawback lawsuits. "And 99 percent of the time, there is no allegation that those clawback targets were complicit in the fraud or somehow anything different than those victims who lost money. However, it is their decision to fight to keep their fraudulent gains to the detriment of their fellow victims that sets them aside from that group."About 150 Zeek profiteers have already settled with the receivership team, and the agreements are expected to add about $2 million to the total recovery, according to court documents. Bell said he encourages "net winners" to continue to contact his office to reach a settlement."They are literally holding other people's money," Bell said.As for Jarvis, who lost about $1,000 in the alleged scheme, he just hopes he can get some of his investment back."It's my own fault I did this," Jarvis said. "Nobody ever pressured me, and nobody ever got pressured in Lexington to do anything against their free will. There was always a choice of whether you wanted to get in or out. I wanted in, and that's how it played out."Nash Dunn can be reached at 249-3981, ext. 227, or at nash.dunn@the-dispatch.com. Follow Nash on Twitter: @LexDispatchNash